Interest rates for federal Stafford Loans for students are expected to increase July 1, when the rates change for the year.
Under federal regulations, student loan interest rates change July 1 every year and are based on a 91-day Treasury bill interest rate calculated during the last auction in May, plus a fixed deferential. The government sells Treasury bills to the public at auctions held weekly throughout the year, and investors can buy them by placing a bid directly with the government or through a broker.
For students still in school or in the six-month grace period following graduation, the differential is 1.7 percent. It increases to 2.3 percent when students begin repayment.
Currently, the in-school student loan interest rate is 2.77 percent, and the repayment rate is 3.37 percent. But if the rates were to be recalculated now, instead of at the end of May, those numbers would increase by approximately 1.75 percentage points, said Martha Holler, spokeswoman for the Sallie Mae Corp., which provides students with education funding.
The increase in interest rates will make student loans more expensive, said Kris Wright, director of the Office of Student Finance.
“Anything that makes loans more expensive makes it harder for students,” Wright said.
But students have enjoyed three years of historically low student loan interest rates, she said, and even with the increase, the rates will remain relatively low compared with other interest rates.
“Interest rates on student loans are already very low compared to mortgage rates or other rates,” she said.
But the increase will be one more challenge middle-class families have to face when trying to send students to college, Wright said.
“It will be harder for them to attend,” she said. “It’s already a struggle for most middle-class families. It’s so much cash that isn’t covered by grants.”
Congress gets involved
Some Congress members are pushing legislation that would give students who consolidate their loans a variable interest rate, as opposed to a fixed interest rate, which is what students receive now when they consolidate.
Right now, students who consolidate their loans after graduation lock in an interest rate – whatever it is when they graduate – for the lifetime of their loan, Holler said.
“The variable rate would fluctuate with the market and would allow students to see the benefits of declining rates,” she said.
A fixed interest rate is also more costly to taxpayers and the government, Holler said. When interest rates increase, the government has to subsidize the difference between
the lower rate students have locked in and the current interest rate.
Alexa Marrero, press secretary for the House Education and Workforce Committee, said switching to a variable rate would save the government thousands of dollars that could be used to increase the affordability of college for students.
“Because the fixed interest rate is so much more costly for the government, Congress is taking steps to reduce that cost,” Marrero said.
It also increases fairness for students, she said.
“A few years ago, interest rates were much higher, so students who borrowed a few years ago are paying more than double the amount that borrowers are today,” Marrero said.
But Tom Kiley, spokesman for Rep. George Miller, D-Calif., said that as student loan interest rates go up, students will be paying more and more to borrow.
“It’s expected that interest rates that are raising now will continue to rise, and it would cost student borrowers thousands more dollars as they continue to increase,” Kiley said.
He said students should be able to lock in interest rates when the rates are low.
Congress will make a decision on consolidation when it votes on the reauthorization of the Higher Education Act.